Illusions of Bayh-Dole: the bathos of university practice, 2

We are working through a report on a workshop discussion of the “manufactured substantially” provision in Bayh-Dole (35 USC 204). Now we get to a rich part of Schwartz’s discussion, actual university practice:

Because Johns Hopkins has applied for and been awarded waivers in the past, they have redrafted their exclusive license template, and the new template actually includes Bayh-Dole language that puts licensees on notice of their obligations:

Let’s work through this language.

JHU’s Exclusive License Template Language

Government Rights. This Agreement is subject to Title 35 Sections 200-204 of the United States Code as implemented in 37 CFR Part 401, as may be amended from time to time.

Actually, no. A contractor’s license is not subject to 35 USC 200-204. Nor merely to the CFR. The licensor is subject to the requirements of 35 USC 200–that establishes that patents on subject inventions are not ordinary patents and a public covenant including a working requirement, a pro-competition requirement, and a requirement to promote American industry and labor run with any subject invention. The licensor is also subject to the requirements of the patent rights clause in the funding agreement under which the invention was made. That includes the government license, a preference for small companies, exposure to march-in procedures, assignment of the nonprofit patent rights clause with any assignment of a subject invention, and obtaining an agreement to manufacture substantially in the United States for any exclusive license to use or sell. These are licensor-side obligations; they are not requirements on the agreement itself. So this part of JHU’s template is nonsense, or at least not true.

Among other things, these provisions provide the United States Government with certain nonexclusive rights in a LICENSED PATENT if federal funds were used to develop the TECHNOLOGY.

As 35 USC 202(c)(4) requires and 37 CFR 401.14(a)(b) implements, the government’s license is to the subject invention and is not limited to any particular patent:

With respect to any subject invention in which the Contractor retains title, the Federal government shall have a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the subject invention throughout the world.

The owner of the subject invention, then, may lose patent rights anywhere in the world that the owner does not pursue patenting and the federal government requests title in those jurisdictions. The owner of the subject invention must pass that exposure on in any license that purports to grant rights worldwide.

Furthermore, the condition is not that “federal funds were used to develop” technology–whether defined in a license agreement or otherwise. In the JHU exclusive license template (find it here), TECHNOLOGY is defined thus:

1.20 “TECHNOLOGY” means the LICENSED PATENT(S), data, KNOW HOW, manufacturing techniques, and any other information or material provided by JHU to LICENSEE. TECHNOLOGY may or may not be confidential in nature.

It’s obvious that federal funding of TECHNOLOGY so defined has next to nothing to do with Bayh-Dole obligations, which are expressly specific to subject inventions, not to data or know how or information or materials. Again, this is a material misrepresentation of the licensor’s obligations under the patent rights clause in the federal funding agreement. If JHU wished to be accurate, the text would read something like this:

Pursuant to 37 CFR 401.14(a)(b), JHU has granted to the Federal government a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the INVENTION throughout the world.

But the JHU license template language is doing something different. It is constructed to make it appear that JHU doesn’t actually know whether the invention to be licensed is a subject invention. That’s the function of the “if federal funds were used.” Either the invention is a subject invention or it’s not. If JHU cannot be clear on this point, why would anyone be fool enough to deal with them? And if the point of declaring an invention as a subject invention under Bayh-Dole, then just do that.

JHU represents that the INVENTION is a subject invention pursuant to 37 CFR 401.14(a) and the federal government has certain rights in the INVENTION.

Any prospective licensee can go RTFM 37 CFR 401.14(a) to see what the government’s rights are. Back to the JHU template clause involving section 204 compliance:

They also impose the obligation that LICENSED PRODUCTS sold or produced in the United States be “manufactured substantially in the United States”.

This part is clearly wrong where it’s not garbled. Section 204 applies only if the license granted is exclusive for use or sale in the United States. The requirement is that the exclusive licensee agree that certain products will be manufactured substantially in the United States. The requirement connects “use” and “sale” with “manufactured”–not “sold or produced.” Again, the requirement is that the exclusive licensee must agree. It is a letter of assurance, not a matter of contractual performance, not a condition of the agreement, but a condition upon which the licensor has legal right to grant the exclusive license. Without that agreement (or a waiver of that obligation), JHU has no legal right to grant an exclusive license to use or sell in the United States.

As for LICENSED PRODUCTS, that too is off.

“LICENSED PRODUCT” shall mean any process or method, material, compositions, drug, or other product, created or developed using TECHNOLOGY, or for which the development, manufacture, use or sale, if done by a third party without rights under the LICENSED PATENT(S), would constitute an infringement of a claim of PATENT RIGHTS (infringement shall include, but is not limited to, direct, contributory, or inducement to infringe).

Here’s section 204:

any products embodying the subject invention or produced through the use of the subject invention

These are simply skew from one another. JHU expands the scope to TECHNOLOGY rather than sticking to INVENTION and then specifies “product” and limits the exploitation of product to infringement of patent rights. Section 204 has none of this–any products embodying the subject invention or produced using the subject invention. It simply does not matter the scope of a particular patent on the subject invention. Perhaps one could argue that these two statements are supposed to say the same thing. If so, why does JHU choose such a bloated, convoluted statement when section 204 provides a clear (in its way) simple statement? But really, the two statements don’t say the same thing–but JHU’s template represents it as if they do and requires licensees to agree–to agree to a misrepresentation of federal patent law as a condition of obtaining a license. It’s like enforcing an illusion on anyone who feels a need to deal with JHU.

2.1 Grant. Subject to the terms and conditions of this Agreement, JHU grants LICENSEE an EXCLUSIVE LICENSE under the LICENSED PATENT(S) in the LICENSED FIELD(S) of USE to utilize the TECHNOLOGY to make, have made, use, import, offer to sell and sell LICENSED PRODUCTS and perform LICENSED SERVICES in the LICENSED TERRITORY.

Just to be complete in making your brain suffer, here’s the definition of “EXCLUSIVE LICENSE”:

“EXCLUSIVE LICENSE” means that, subject to specific limitations in this Agreement, and subject to rights retained by the United States Government, if any, JHU grants to LICENSEE all of JHU’s rights under the LICENSED PATENT(S) in the LICENSED FIELD of USE in the LICENSED TERRITORY. Exclusive refers to PATENT RIGHTS only. KNOW HOW, data and other materials licensed are provided on a non-exclusive basis only.

Note again the little “if any”–again, this indicates that JHU won’t reveal whether the licensed invention is a subject invention. That’s bad practice. Not to mention that the definition is attempting to do what the body of the agreement does. Packing operational elements into definitions–including the bit at the end–is also bad practice. It’s not just a pretty bunny here. The point: JHU’s template functions as an assignment of the INVENTION–“to make, have made, use, import, offer to sell and sell.”

As an assignee of the subject invention, the exclusive licensee of the patent has no obligation under section 204, any more than would a small business deciding where to manufacture product based on a subject invention it owns. Section 204 applies only when an owner of a subject invention chooses to grant an exclusive license to use or sell. Section 204 has nothing to do with what an invention owner does on its own–and assignees are expressly called out along with the small businesses and nonprofits that acquire title to subject inventions.

But here’s the burden of JHU’s template language:

LICENSEE will ensure all required obligations of these provisions are met.

This bit, it turns out, is actually rather true. Since the licensee is actually an assignee, then JHU is required by the patent rights clause specific to nonprofits to pass on to the assignee the patent rights clause. The licensee is indeed required to be responsible for all provisions of the patent rights clause because the exclusive licensee of the patent is also the assignee of the subject invention. I am sure, however, this is not what JHU intends. In the JHU illusion of Bayh-Dole, JHU aims to shift JHU’s compliance with the law to the exclusive licensee. Somehow the licensee will stand in for JHU. There is no provision in section 204 for such standing in. The invention owner has the obligation to obtain agreement or waiver–it is not the obligation of the exclusive licensee. The invention owner cannot grant the exclusive license without the agreement or a waiver of the agreement. Again, this is the language that would suggest to any reasonable licensee “Run away!”

But Schwartz reports a response suggesting that JHU has been clever–by transferring the obligation under 204 to the licensee, the licensor doesn’t have to be bothered:

What happens if you’re not granted a waiver and the licensee goes forward with their plans?

The licensee will be in breach of your license if you have incorporated the government rights language noted above in your licenses. Plus, the Government has the ability to exercise march-in rights. March-in rights, the right of the government to grant additional licensees (exclusive and non-exclusive) to other reasonable applicants are limited, but are a real possibility and should be taken seriously.

The correct answer is: if the licensee declines to agree, you have no legal right to grant the exclusive license. Assign or license non-exclusively or refuse to deal. But that’s not the scheme endorsed by Schwartz. As we have pointed out, in the JHU template, the exclusive license acts as an assignment. The licensee becomes an assignee, is responsible for compliance with the patent rights clause, but is absolutely not in breach of the JHU license by manufacturing in a foreign country. JHU has no idea what it is doing, but bumbles toward the truth. Schwartz, too, has no idea what JHU is doing.

As for march-in rights, it’s all true. Take a look at section 203(a)(4). The federal government can march in if

(4) action is necessary because the agreement required by section 204 has not been obtained or waived or because a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of its agreement obtained pursuant to section 204.

The march-in provision again is clear that exclusive licensees may be assignees:

require the contractor, an assignee or exclusive licensee of a subject invention

Here’s the march-in remedy:

to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, and if the contractor, assignee, or exclusive licensee refuses such request, to grant such a license itself

There’s quite a bit going on here. We should keep clearly in mind none of this has ever happened. The procedure was designed not to operate and it never has. It’s like a machine that makes a wild noise but does nothing else. Let’s parse a bit at a time. If the federal government discovers that an exclusive licensee (to use or sell) has not agreed, then the exclusive license is unauthorized–illegal. The federal agency might make that license authorized by granting a waiver and be done with it. The same is true if the agreement was obtained, but breached.

Now let’s deal with the logic of the alternatives. If the federal government requires granting of a non-exclusive license to one or more “applicants,” then 204 no longer applies. Same for whatever someone meant by a “partially exclusive license.” A partially exclusive license is not an exclusive license any more than a partially alive cat is a living cat. Once the license is not exclusive, anyone can manufacture anywhere (but for any foreign licenses they might also need). The effect, then, of the march-in is to completely undermine US manufacture! The moment the original license is no longer exclusive to use or to sell, there is no requirement to manufacture in the United States. What then does a federal agency gain as a benefit to United States industry by marching in with a non-exclusive license demand? Nothing at all. This march-in simply voids application of 204.

Now consider the government marching in to require an exclusive license. Granting an exclusive license means that the government can void the existing license altogether. That would leave the existing exclusive licensee high and dry. To avoid this outcome, the licensee could include a conditional in the license agreement to this effect: “if any government march-in proceeding under 35 USC 203(a)(4) is initiated, licensor shall immediately apply for a waiver, or amended waiver to the requirement under 35 USC 204, and failing that, the license granted to any subject invention under this agreement shall become non-exclusive.” Or the license could be expanded to become an assignment: “the license granted to any subject invention under this agreement shall be expanded to include the exclusive right to make, use, and sell the invention.” Since a march-in is about as likely as UFOs from the planet Clarion arriving to save us from all badness, this clause is along the lines of if those UFOs do arrive, at least we will have a towel to flag them down and hitch a ride.